FX Watch: US dollar eyes July 2023 low, AUD/USD sees further signs of life

“The time has come”

Federal Reserve (Fed) Chair Jerome Powell has sounded a tad more dovish at Jackson Hole to end last week, with a clear resolve in his tone to ease rates as soon as the next meeting. As such, markets got what they hope to hear around confirmation for a September rate move and the Fed heading into rescue mode, with a strong message that they “do not seek or welcome further cooling in labour market conditions”. Further disinflation progress and higher unemployment rate thus far have clearly offered the Fed the justification for a pivot, with the balance of risks now shifted towards supporting growth.

Implications ahead could be further weakness in the US dollar and strength in gold and silver prices, as Treasury yields continue to moderate. It will also have to take a significant worsening in economic conditions to dent the equities rally, given that the soft-landing scenario has been the consensus and there are hopes that further economic normalisation will be met with upcoming policy easing. We prefer retaining exposure to the technology and communication services sector on earnings resilience, while looking towards utilities and real estate sectors as catch-up plays on lower rates ahead.

The debate will continue to run on whether we will get a 25 basis point (bp) or a 50 bp cut next month, and what comes after that. The Fed probably does not know any more than markets do, sticking to its data-dependent stance to retain some policy flexibility and refraining from giving any hard commitments. All eyes will therefore be on the upcoming US non-farm job report and a series of inflation read to firm up expectations, with a weaker labour front likely to see rate bets swing to a 50 bp move.

US dollar index: Eyeing for July 2023 low

It has been all gloomy for the US dollar, which extended its losses by another 0.7% in the aftermath of Fed Chair Jerome Powell’s Jackson Hole speech. Historical cues suggest that the US dollar tends to weaken in the lead-up to the Fed’s rate-cutting process, which has been playing out thus far.

While near-term oversold technical conditions may call for some calm, the US dollar may continue to eye a retest of its July 2023 low at the 99.40 level ahead, with any breakdown of the level potentially paving the way towards the 97.00 level. Thus far, the broader bias remains on the downside, with its daily relative strength index (RSI) trading below the mid-line and its daily moving average convergence/divergence (MACD) dipping further into negative territory.

AUD/USD: Can we finally see a new year-to-date high ahead?

The AUD/USD is back to retest its July 2024 level, with the pair returning more than 7% since the 5 August 2024 low. A weaker US dollar has been well-supportive, while expectations continue to brew that the Reserve Bank of Australia (RBA) may lag other major central banks in its easing cycle. Firmer commodities prices and hopes for more stimulus efforts from China towards the rest of the year may serve as positive catalysts as well.

Any move above the 0.686 level will be crucial, having been a resistance confluence to overcome, which could pave the way towards the 0.714 level next. On any downside, the 0.663 level may be on watch as near-term support to defend.